Buying a home

Market Dynamics Shift

Australia's housing market entered 2026 with momentum from last year's 8.6% price growth, but the landscape shifted abruptly in February. The Reserve Bank of Australia raised the cash rate by 25 basis points to 3.85%, responding to inflation climbing to 3.8% annually. This move reversed a brief easing cycle that began in 2025, which had added roughly $75,000 to median dwelling values through lower borrowing costs.

The hike directly affects buyers: for a typical $700,000 loan, repayments rise by about $110 per month. Borrowing capacity for median-income households drops by $18,000, narrowing options in a market where median house prices hit $973,000 in January. Over a third of mortgage holders already report stress, and this could push more toward cheaper segments or delay purchases entirely.

Underpinning the pressure is a severe supply crunch. Australia faces a shortfall of over 200,000 homes, exacerbated by high construction costs and sluggish building rates. Inventory sits 25% below five-year averages, fueling competition and supporting price rises despite economic headwinds. Regional areas and mid-sized capitals like Perth (forecast 12.8% growth) and Brisbane (10.9%) outperform Sydney and Melbourne, creating a multi-speed market where affordability varies sharply.

Less visible are policy tensions. Discussions around reducing the 50% capital gains tax discount, which cost the budget $19.7 billion last year, aim to curb speculative investment and free up stock. Yet this risks alienating property owners, who hold $12.3 trillion in assets against $2.5 trillion in debt. Half of homeowners are mortgage-free, benefiting from gains since 2020 totaling $4.5 trillion. Meanwhile, land prices have tripled faster than building costs over 25 years, with median lots at $391,420—locking out new entrants and inflating overall values.

Trade-offs abound: rate hikes may cool inflation but could stall economic growth if they suppress spending. Supply fixes like boosting construction face labor shortages and material costs, while tax reforms might increase revenue but deter investors needed for rental supply. Surprising data shows lower-quartile homes rising faster (1.3% in January) than premium ones (0.3%), signaling shifts toward affordability-driven demand.